Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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Editor/Trans.
First Pub. Date
1881
Publisher/Edition
New York: Maynard, Merrill, and Co.
Pub. Date
1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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EXCHANGE AND "FOREIGN EXCHANGES."

II.34.1

EXCHANGE AND "FOREIGN EXCHANGES". Exchange is a term that makes a great figure in political economy. In the view of one school of economists, indeed, it covers the whole domain of economic science; but at least a severe strain is put on the word by including under it the laws of production as well as of the distribution of wealth. No theory of population can well be brought within the limits of exchange; hence some authors who define political economy as the science of exchanges, or of value, are disposed to relegate to another department of sociology of all inquiry into the laws of population. Yet almost all text books of economics do, as a matter of fact, include some theory of population. It may throw some light on the part played by exchange, as distinguished from production in the economy of society, to point to the errors committed by writers who, like Mr. II. D. Macleod, treat bills of exchange, promissory notes, and other instruments of credit and acknowledgements of debt, as themselves constituting wealth—adding pro tanto to the sum of a nation's valuable possessions. There is in this doctrine a confusion between production and exchange. The argument in support of it is, that such instruments have an exchangeable value and must therefore be wealth. The answer is, that when a man borrows say £100 on his promissory note or bill for £105, all that takes place is an exchange between borrower and lender. There is no production of new wealth; £100 in hand is exchanged for £105 at a future time; and the note or bill is only evidence of the claim to the £105. An instrument of credit resembles the title deed to an estate. When a person buys a landed estate, all that is visibly transferred in the first instance, in exchange for the purchase money, is the conveyance or title deed: but what it really bought is the estate, and nothing but an exchange is effected. Doubtless bills of exchange and other instruments of credit may add indirectly to the wealth of a country in two ways: 1. by enabling persons engaged in production to borrow funds which would otherwise have been unemployed and unproductive; 2. by taking the place of coin as media of exchange, and saving the cost of metallic currency. But there are unproductive as well as productive borrowers, and instruments of credit may transfer to prodigals sums that might have been productively employed.

II.34.2

—A large and increasing number of writers in England, Germany, France, Italy, and Belgium refuse to restrict the field even of distribution to the partition of wealth by exchange, which, like J.S. Mill, they regard as only a particular mode of distribution. Adam Smith, in the First Book of the Wealth of Nations, under the head of "natural distribution," treated only, it is true, of the division of the annual produce of a country effected by the exchanges consequent on the appropriation of land, the accumulation of capital, and the division of labor; but in the Third Book he has referred to the distribution effected by laws of property and succession; and both in England and on the continent of Europe there is a growing tendency on the part of economists to extend their investigations to the effects of positive laws and political institutions upon both production and distribution. Nevertheless the topics which have hitherto covered the greatest part of the ground in almost every systematic treatise on political economy, fall under the head of exchange, and in any view of the limits of the science, the importance of the subject can hardly be overestimated.

II.34.3

—It is characteristic of the method of the purely deductive school of economists founded by David Ricardo, that his theory of exchange and value was deduced from the assumption, in his own words, that in the early stages of society the exchangeable value of commodities depends almost exclusively upon the comparative quantity of labor expended on each. If, for example, he said, among a nation of hunters it usually costs twice the labor to kill a beaver that it does to kill a deer one beaver should exchange for two deer. And on this principle he inferred that the value of all things, except those which cannot be increased by industry, depends. But the assumption is plainly an untenable one Labor is too abstract a measure for the minds of uncivilized men to conceive; there is indeed, no regular labor among them, and the produce of the chase is in a great degree governed by chance. The earlier stages of society are regarded by most modern investigators as having been more or less communistic, with little or no individual property; in which case few, if any, exchanges could take place. And if any, they would probably follow the principle of the exchange between Esau and Jacob, of a birthright for a disk of pottage; being determined by the relative urgency of the needs of the parties. Even at a more advanced social stage, at the beginning of settled agricultural life, each family would probably provide for its own wants, and few exchanges would take place within each little community. Regular exchange or traffic seems to have begun, not within the community, whether of hunters, shepherds or farmers, but between different communities, exchanging the special produce of different localities. Such exchanges could not be governed by estimates of labor or cost of production; they would partake of the nature of international exchanges, and fall under the principle which Mr. Mill applies to international commerce and values, namely, demand and supply. Nor would it be difficult to show that in a great modern and industrial society the relative cost of an infinite multitude of commodities in incalculable, and that the hard and fast line drawn by Mr. Mill between international values and the values of things produced in the same country, is untenable. The best general formula for the conditions determining values is, in short, demand and supply. Cost of production, even within the same country, can act on value only by roughly adjusting the supply to the demand, and its action is uncertain and irregular.

II.34.4

—A grave error in both Ricardo's and J.S. Mill's exposition of the principles governing both internal and international exchanges and values seems to have escaped detection. According to the two great writers referred to, the introduction of money makes no difference in the terms on which exchanges are conducted, or in the values of the commodities exchanged. Things, says Mr. Mill that would have been barter, are worth equal sums of money. And he quotes with emphatic approval the words of Ricardo, that "gold and silver, being chosen for the general medium of circulation, are by the competition of commerce distributed in such proportions among the different countries of the world as to accommodate themselves to the natural traffic which would take place if no such metals existed and the trade between them were a trade of barter" An example will show at once the fallacy of this doctrine. Were the precious metals not in circulation in China, and the barter of English cottons, woolens and hardware for Chinese tea, the system of trade between the two countries the demand of China for the manufactures of England might be so small that tea could only be procured by the latter country on the most onerous terms of exchange. But let silver become current as money in China, and the demand of the Chinese for that metal, both for circulation and hoarding, might become so intense that with a given quantity of manufactures England might buy in America enough silver to pay for twenty times as much tea as she got for the same amount of goods by direct barter. Mr. Mill forgot his own doctrine that money differs from all other things in the property that it is the object of a demand to which there is no limit. His reasoning confounds also two very different propositions. It is true, as he argues, that both under a money system and a system of barter the equation of international demand is the fundamental principle of international trade But it does not follow that the reciprocal demand is the same under the two systems; the exchange may be conducted on very different terms, and very different equations may exist under money and barter respectively.

II.34.5

—The transactions, however, which mercantile men generally have in view when they speak of the exchange between different countries, are those technically called the foreign exchanges, in which the balance of international dealings, the prices for foreign bills of exchange and the movements of bullion are the chief objects of consideration. The balance of international dealings and claims, it is now well known, is no mere balance of international trade. In the middle ages the balance of exports and imports between England and the continent was generally in favor of England, for whose wool the continental demand was intense. Yet the balance of international payments was often against England; and that country, though possessing, down to the fifteenth century, mines of precious metal, with difficulty maintained a scanty stock of coin for circulation. The reason was, that the exactions of the pope, the revenues drawn from English benefices by foreign incumbents, and the sums wasted by English kings in continental wars, caused a constant draw on the English currency. On the other hand, in our own age England has maintained a generally favorable balance of dealings with the world, although her demand for foreign commodities has often exceeded that of her foreign customers for her manufacturers, because many other items besides purely commercial exports and imports go to determine the claims of England on the rest of the globe. She receives vast sums in payment on interest on capital invested abroad; she has an immense carrying trade, and her earnings for freight make a large figure inher imports; and she receives, in addition, large payments in commodities from India for the government of that great dependency. Were the United States or France by superior ship building and navigation to deprive England of her carrying trade, the amount of her imports would fall off, the country cutting her out of the business would get the imports she now receives in payment of freight; the exchanges would turn heavily against her, and a drain of the precious metals from her shores would infallibly follow. The case of the United States is different. America is able, in spite of the loss of no small part of her former share of the carrying trade, to maintain a favorable balance of exchange with foreign countries because of their immense demand for her exports.

II.34.6

—The chief rule laid down in treatises on foreign exchanges is, that the premium on a bill of exchange in a foreign country can not in ordinary cases exceed the cost, in freight, insurance and brokers' charges, of sending the sum in actual bullion; and that the discount, in like manner, on a foreign bill can not exceed the cost of transmitting the required amount in gold or silver. Under peculiar circumstances, however, the premium or the discount, it is now well ascertained, may exceed the expense of transmitting the precious metals. Thus at the beginning of the American civil war there was a great anxiety in the United States for gold, and at the same time a very large amount was due from Europe, for which Americans held bills. Had they been willing to wait until the money could be brought over, the discount on the bills could not have exceeded the cost of its transmission. But in their eagerness to realize at once and to get cash, the holders of the bills parted with them on much less favorable terms. The cause of the great rise in England in the premium on bills on the continent, when the news of Napoleon's escape from Elba arrived, was of a different nature. The premium could not have exceeded the cost of sending bullion had the notes of the bank of England been convertible, for any one could have presented notes at the bank demanded cash, and sent it to the continent. But at that time the payment in cash of bank of England notes was suspended, and the notes were depreciated. Hence to the expense of remitting bullion was added a charge proportionate to the depreciation of the notes with which the bills were bought. Again, the discount on foreign bills of exchange may descend below "specie point," as it is called, from distrust. Uncertainty respecting the solvency of the parties bound to meet the bills at maturity or respecting the state of credit in the country on which they are drawn, may lower their price in a degree to which there is no assignable limit.

II.34.7

—It will be seen from what has been said, that the topics coming under the head of Exchange are wide enough without treating it as co-extensive with the entire field of economic science.

T. E. CLIFFE LESLIE.

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